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Section 10A of the Income-tax Act relates to special provision in respect of newly established industrial undertakings in free trade zones, export processing zones, electronic hardware technology parks, software technology parks or special economic zones notified by the Central Government. The section exempts the profits and gains of such undertakings derived from the export of articles or things or computer software.

(1) Assessees who are eligible to claim exemption

The benefit of exemption under this section is available to all categories of assessees who derive any profits or gains from an undertaking engaged in export of articles or things or computer software. The profits and gains derived from on-site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

(2) Conditions to be satisfied for claiming exemption

This section applies to any undertaking which fulfills the following conditions:

(i) It has begun manufacture or production (include the cutting and polishing of precious and semi-precious stones) of articles, things or computer software during the previous year relevant to the:

(a) A.Y.1981-82 or thereafter in any FTZ; or

(b) A.Y.1994-95 or thereafter in any electronic hardware technology park (EHTP) or software technology park (STP); or

(c) A.Y.2001-2002 or thereafter in any SEZ.

(ii) It is not formed by the splitting up, or reconstruction, of a business already in existence.

However, this condition shall not apply to an undertaking which is formed as a result of re-establishment, reconstruction or revival of the business of any undertaking falling under section 33B.

(iii) It is not formed by the transfer of machinery or plant previously used for any purpose. For the purposes of this clause, any machinery or plant used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled:

(a) such machinery or plant was not, at any time previous to the date of installation by the assessee, used in India;

(b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has

been allowed or is allowable under the provisions of this Act in computing the total income of any person prior to the date of installation of the machinery or plant by the assessee.

(d) Further, where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business, and the total value of the machinery, etc. transferred does not exceed 20% of the total value of the machinery and plant used for the business.

(iv) The sale proceeds of articles, things or computer software exported out of India must be brought into India in convertible foreign exchange within six months from the end of the previous year, or such further period as the competent authority may allow. For this purpose, "competent authority" means the RBI or such other authority as is authorised for regulating payments and dealings in foreign exchange.

Further, where the sale proceeds are credited to a separate account maintained by the assessee with any bank outside India with the approval of the RBI, such sale proceeds shall be deemed to have been received in India.

(v) In order to claim deduction under this section, the assessee should furnish an audit report from a chartered accountant in Form No.56F, along with the return of income, certifying that the deduction has been correctly claimed. However, no deduction u/s 10A shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under section 139(1).

(3) Period of tax holiday

No deduction shall be available for A.Y.2010-11 and thereafter i.e. deduction shall be allowed maximum up to A.Y.2009-10. Such profits will be exempt for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be.

Examples:

(i) If an undertaking is set up on 1.3.2000, then exemption shall be allowed for a period of 10 years beginning from A.Y.2000-01 upto A.Y.2009-10.

(ii) If an undertaking is set up on 1.3.2001, then exemption shall be allowed for a period of maximum 9 years beginning from A.Y.2001-02 upto A.Y.2009-10.

(iii) If an undertaking is set up on 1.3.2002, then exemption shall be allowed for a period of maximum 8 years beginning from A.Y.2002-03 upto A.Y.2009-10.

(4) Exemption in case of units established in SEZ on or after 1.4.2002 - Section 10A(1A)

In case of an undertaking in any SEZ, which begins to manufacture or produce articles or things or computer software on or after 1.4.2002, the exemption shall be as follows:

(i) 100% of the profits for 5 consecutive years beginning with the first assessment year in which it begins to manufacture, and

(ii) 50% of the profits for a further 2 assessment years.

(iii) In addition to the above, exemption for the next 3 years is provided of an amount not exceeding 50% of the profit debited to profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be called “Special Economic Zone Re-investment Allowance Reserve Account”. This Reserve is to be created and utilised in the manner laid down under section 10A(1B).

(5) Utilisation of the reserve - Section 10A(1B)

The amount credited to the reserve account is to be utilised in the following manner –

(i) for the purposes of acquiring new machinery or plant which is first put to use within 3 years from the previous year in which the reserve was created; and

(ii) until the acquisition of new machinery or plant, the amount can be utilised for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

The prescribed particulars in respect of new machinery or plant should be furnished by the assessee along with the return of income for the assessment year relevant to the previous

year in which such plant or machinery was first put to use.

(6) Consequences of mis-utilisation / non-utilisation of reserve - Section 10A(1C) If the amount credited to the reserve account has been utilised for any purpose other than those referred to u/s 10A(1B), the amount so utilised shall be deemed to be the profits in the year in which the amount was so utilised. If any amount credited to the reserve account has not been utilised before the expiry of 3 years from the previous year in which the reserve was created, then the unutilised amount shall be deemed to be the profits in the year immediately following the said period of three years and shall be charged to tax accordingly.

(7) Computation of profit from exports of such undertakings – Section 10A(4)

The profit derived from export shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles, things or computer software bears to the total turnover of the business. i.e.

g

Big Ltd. exports articles and has furnished the following particulars for the P.Y.2006-07

Export sales Rs.60,00,000

Domestic sales Rs.20,00,000

Total sales Rs.80,00,000

Money brought to India in convertible foreign exchange Rs.50,00,000

Profits from business Rs.16,00,000

You are required to compute the exemption available u/s 10A for the A.Y.2007-08.

Solution

The exemption available u/s 10A is

business

(8) Restrictions on other tax benefits

In computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment year, the following provisions shall apply:

(i) In computing depreciation under section 32, the written down value (WDV) of any asset used for the business shall be computed as if the assessee had claimed and actually been allowed the deduction in respect of the relevant assessment year.

(ii) No deduction shall be allowed under section 80-IA or 80-IB.

(iii) Any unabsorbed depreciation under section 32(2) or business loss under section 72(1) or loss under the head “Capital gains” under section 74 of the undertaking shall be allowed to be carried forward and set off in the subsequent assessment years.

The provisions of 80-IA(8) and 80-IA(10) shall apply in relation to the undertaking as they apply for the purposes of the undertaking referred to in that section.

(9) Exemption allowable in case of amalgamation/demerger

Where an undertaking of an Indian company is transferred to another company under a scheme of amalgamation or demerger, the deduction shall be allowable in the hands of the amalgamated or resulting company.

However, no deduction shall be admissible under these sections to the amalgamating company or the demerged company for the previous year in which amalgamation or demerger takes place.

(10) Declaration to be furnished for non-applicability of the section

This section is optional for the assessee. The provisions of this section shall not apply for any of the relevant assessment years where the assessee before the due date under section 139(1) furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him.

(11) Shifting of an undertaking from FTZ / EPZ to SEZ

Where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such zones, the period of ten consecutive assessment years shall be reckoned from the assessment year relevant to the previous year in which the undertaking began manufacture or production in such free trade zone or export processing zone, as the case may be.

(12) Definitions for the purpose of this section (i) "Computer software" means

(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

(b) any customized electronic data or any product or service of similar nature, as may be notified by the Board.

which is transmitted or exported from India to any place outside India by any means.

(ii) "Export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.

Note: New units established in SEZ on or after 1.4.2005, shall not be allowed to take the benefit of exemption under section 10A. They shall be entitled to benefit under section 10AA.

3.4 TAX HOLIDAY FOR NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONES